USD/JPY: Yen carry risks build into Q4 – Rabobank

Rabobank's Global Daily report highlights the unexpected strength of the U.S. dollar in Q3, causing a significant movement in USD/JPY. The yen carry trade may face risks if this trend continues, as the report warns. Emerging market currencies, with the exception of the Chinese Yuan (CNY), are also weakening against the dollar. This unexpected dollar strength caught FX markets off guard, with only a few exceptions.

The U.S. dollar index (DXY) showed slight gains during Q3, while other currencies, such as the euro (EUR) and British pound (GBP), remained relatively stagnant. Rabobank's report specifically emphasizes the notable jump in USD/JPY, which may influence the yen carry trade if it persists. The Australian dollar (AUD) is trading near its two-month lows, amid disappointing August underlying CPI data and a pause in U.S. dollar advance.

Chinese PMI data also failed to boost the Australian dollar, despite a brief respite in the U.S. dollar's upward momentum. Meanwhile, the Japanese yen (JPY) benefits from hawkish Bank of Japan (BoJ) expectations and intervention risks, as it struggles with poor domestic economic indicators, such as factory output and retail sales.

Gold has been consolidating its price and is trading below $4,200, influenced by mixed fundamental cues. The U.S. bond yields are declining, providing a tailwind for gold, while the Federal Reserve's hawkish stance could cap gold's upside as traders await crucial U.S. macro data before placing bets on the precious metal.